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in Economics by (106k points)

X is a normal good for consumers. Their income increases. Explain its chain of effects on equilibrium price, demand and supply of X. (use diagram).

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Increase in income results in increase in demand for the normal good, DD curve shifts to dd'. There is excess demand (equal to AB) at OP price. The buyers compete. Price starts rising. Demand starts falling (contraction) and supply starts rising (extension). These changes continue till price reaches OP1. At this price DD = SS. Market is in equilibrium again at a higher price and equilibrium quantity rises to OQ1.

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